mdk003

1099 Questions

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I got a 1099 on a very old debt earlier this year. As it turns out, we ended up filing an extension and haven't filed our taxes yet. So I'm trying to figure out what to do with the 1099.

First of all, this is a completely unsettled debt. They harassed me about it, and I ended up filing a complaint with the AGO against them. I also requested debt validation at the same time. They responded to the AGO by denying everything, and putting me into non-contact status. I was fine with that, so I didn't pursue the DV or anything else.

Two years later, they sent me a 1099 out of the blue. The box for "interest and penalties" was left blank. The 1099 is for the entire amount they claim I owe, even though this presumably includes interest and fees, and this amount has never been proven in court. In other words, there has never been a judgment served, nor have they ever responded to a DV request. It's far outside the SOL, in case that matters.

I'm not sure how to proceed on this one. Do I contact the collector and ask for a new 1099? I'm not sure they'd respond, and, at best, they'd probably just make up some new amount I owed excluding fees. I'm not sure that's even fair since the amount is still disputed.

Or do I contact the IRS, and tell them this is a disputed debt? How do you do that anyway? Can I just include a note in my tax filing laying out the case and refuse to pay it?

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Do a search for "DiveMedic" and "1099". He had exactly the same problem. Even won in court that the debt wasn't his (I think), but he wound up paying taxes on it anyway.

You can call the IRS...but most likely you're going to have to go to court to catch these people for filing a fraudelent 1099. You might want to see if there is a www.naca.net lawyer in your area that will help.

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WTC and I have a slightly different view on the issue of 1099s. There is an IRS Form you should look at -- either 958 or 985 (I cannot remember) that will allow you to avoid taxation on the 1099c if you meet certain tests.

Other than the above mentioned possible exception, this is a very complex area. One where the rules are still evolving and there is great confusion. This gives you no consolation, but you are on the leading edge of a very large wave of these "out-of-the-blue" 1099s that will be surprising a lot of folks over the next six to 12 months.

But first, some background.

1099s are creatures of the IRS. You can read everything you want to know about a 1099c at this link: http://www.irs.gov/instructions/i1099ac/ar02.html#d0e261

The IRS has for quite some time required banks government entities to issue a 1099C for debt that was forgiven. The IRS thinking has been that if you borrowed money and never paid back the money, then that borrowing should be taxed as income.

Most charged-off debt is sold by original creditors to a debt buyer at a discount. The debt buyer then attempts to collect the debt. Around 2005 or so, there was a change in the IRS instructions that for the first time required debt buyers to issue a 1099c. The Debt Buyers Association was very much opposed to this requirement and filed suit against the IRS (DBA v Snow). The DBA lost that litigation in 2006.

Debt Buyers hate the idea of issuing a 1099c. It is not only an administrative expense but a litigation risk and the DB is subject to fairly burdensome IRS compliance audits.

The holder of the debt has no vote in the matter. They are required to issue the 1099c. The IRS has established a list of eight different situations under which a 1099c must be issued. Those triggers are:

1. A discharge in bankruptcy under Title 11 of the U.S. Code for business or investment debt

2. A cancellation or extinguishment making the debt unenforceable in a receivership, foreclosure, or similar federal or state court proceeding.

3. A cancellation or extinguishment when the statute of limitations for collecting the debt expires, or when the statutory period for filing a claim or beginning a deficiency judgment proceeding expires. Expiration of the statute of limitations is an identifiable event only when a debtor's affirmative statute of limitations defense is upheld in a final judgment or decision of a court and the appeal period has expired.

4. A cancellation or extinguishment when the creditor elects foreclosure remedies that by law end or bar the creditor's right to collect the debt. This event applies to a mortgage lender or holder who is barred by local law from pursuing debt collection after a “power of sale” in the mortgage or deed of trust is exercised.

5. A cancellation or extinguishment due to a probate or similar proceeding.

6. A discharge of indebtedness under an agreement between the creditor and the debtor to cancel the debt at less than full consideration.

7. A discharge of indebtedness because of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt. A creditor's defined policy can be in writing or an established business practice of the creditor. A creditor's practice to stop collection activity and abandon a debt when a particular nonpayment period expires is a defined policy.

8. The expiration of nonpayment testing period. This event occurs when the creditor has not received a payment on the debt during the testing period. The testing period is a 36-month period ending on December 31 plus any time when the creditor was precluded from collection activity by a stay in bankruptcy or similar bar under state or local law. The creditor can rebut the occurrence of this identifiable event if:

1. The creditor (or a third-party collection agency) has engaged in significant bona fide collection activity during the 12-month period ending on December 31 or

2. Facts and circumstances that exist on January 31 following the end of the 36-month period indicate that the debt was not canceled.

Significant bona fide collection activity does not include nominal or ministerial collection action, such as an automated mailing. Facts and circumstances indicating that a debt was not canceled include the existence of a lien relating to the debt (up to the value of the security) or the sale or packaging for sale of the debt by the creditor.

It is hard to know which event triggered the issuance of your 1099c -- it could easily be #3 or #7. Trigger #8 is the biggie that is going to the driver of a great deal of this activity.

The DBA and the ACA have asked the IRS for guidance on all sorts of questions about how they are to prepare the 1099c. There are probably a thousand questions about what if this or what if that. Right now, no one really has any answers. The IRS has said they will probably respond to these questions sometime in 2008.

Until then, all you can do is look to the IRS instructions for guidance.

How does all the affect the OP?

Based on your statements, my thinking is that the issuance of the 1099 was going to happen sometime -- later if not today. You basically acknowledge owing the debt but have objections based on the debt holders failure to satisfy you as to whatever you wanted that they could not or would not provide.

I don't think the IRS will much care about all that. The IRS mindset is you owe the taxes unless it is identity theft.

What do you do? WTC's suggestion is fine as it is basically a direction to educate yourself as to how someone else handled a similar situation. You might speak to a tax lawyer. You might talk to a NACA lawyer to see if there is any potential FDCPA issues (personally, I think not but more later on that subject).

You can talk to the IRS. I have no idea what they will say. I do know that you've got to square yourself with the IRS one way or the other. Telling the IRS that you refuse to pay the tax due might not be a good idea.

Now, I'll share some personal thoughts and perspectives and guesses:

1. The issuance of the 1099 is not voluntary. The DB is subject to penalty for failure to issue the 1099c if it hits one of those trigger events.

2. I think the most debate will be in regard to debts that have not been validated. Forgetting for a minute that there is no consensus for how to define validation, there is absolutely no out in the IRS instructions for the DB to get around issuing a 1099 for a debt that has been disputed.

3. A debt that has been disputed and not validated does not mean that the debt never existed. It only means that the DB did not jump through certain administrative hoops. Those might be meaningful hoops for some purposes but those hoops are not grounds for failing to issue the 1099c. I think the DB would gladly bury those 1099s in a box in the basement if they could get away with it. I do not think the IRS is going to let them get away with it come time for the compliance audit.

4. There are zillions of debts in the portfolios of debt buyers where the DB has lost contact with the debtor. To me this is a very similar situation to the zillions of bank accounts where the bank has lost contact with the depositor. The IRS has a pretty consistent policy that I think will be applied in both situations -- send the 1099c to the address you got. The ones that get returned will go in a box to show the auditors. Otherwise, the IRS will then match up the IRS copy of the 1099 to the tax returns using the social security number. The IRS is very good at this. The taxpayer will get a bill for additional taxes for a 1099 they never knew about.

5. I recently had a interesting discussion with a fellow who thought that the issuance of a 1099c was continuing collection activity and thus an FDCPA violation. I have a hard time making that one fit from a logic perspective. Continuing collection activity means some sort of action intended to provide leverage or gain to the creditor in contravention of the FDCPA. I don't see a 1099 falling into that category -- it does not provide leverage or gain to the creditor. Certainly, it is not a voluntary action. It would be very difficult for me to see a federal judge punishing a DB for doing exactly what he was told to do by the IRS.

6. The IRS has been absolutely clear that a 1099c should not be issued in cases of identity theft. Not even the IRS expects someone to pay taxes on a benefit they never received. Anyone who has been a victim needs to be sure they had jumped through all the hoops with their creditors.

7. The area where everyone will be sharpening their teeth will be the notion of a "fraudulent 1099c". The adjective fraudulent is defined as: characterized by, involving, or proceeding from fraud, as actions, enterprise, methods, or gains. When people use the term fraudulent I think they really mean "in error" or most likely "I don't agree because no one ever proved to me (fill in the blank)".

8. As I read the instructions, the short version of what the IRS says about defining the amount of the debt to be reported on the 1099 is "everything less accrued interest and other penalties and fees" -- which says to me principal. But, I can think of several different ways to define principal for an old credit card. Which one? No one knows yet. The DBA and ACA are cautiously hopeful that the IRS will give them a definition they can work with. This could be a challenge as many of the older debts have no real history any longer and it is not exactly clear what part of the balance is principal and what part is something else. I have no idea what the DBs will do if the IRS does not provide guidance on this question.

9. Of course, nowhere in the IRS instruction does it specify that reporting the debt as forgiven means that it cannot still be collected or sold to someone else and collected. The General Counsel of the IRS has pretty explicitly stated that the issuance of the 1099c does not prohibit subsequent collection of the debt. Unsaid, but I think, logical, is the notion that a subsequent collection would trigger an amended or corrected 1099c to reflect the subsequent event.

I know this was probably a whole lot more than you wanted. Regardless, there will be many more folks following in your steps and dealing with this same issue. The quicker people get to thinking about this, the more helpful it will be.

Please let me know how you proceed with this.

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WTC and I have a slightly different view on the issue of 1099s.
Oh, no! You summed it up quite nicely. I agree with everything you said.

And, for future reference by anyone who might be looking at the "insolvency" route to get out of dealing with the IRS over a 1099c, I would further add that the IRS definition of insolvency seems to apply at the time the 1099c is issued, not at the time the debt was resolved. While this does not apply to debts included in bankruptcy, it certainly applies to debt "settled for less than the full amount". Although, again, this would have to be resolved by the courts, IMO, this means that if you settle a debt today, and they don't issue the 1099c for 3 years, its your income 3 years from now that determines insolvency.

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I would further add that the IRS definition of insolvency seems to apply at the time the 1099c is issued, not at the time the debt was resolved.

My interpretation has always been that the insolvency test is one second before the "event" -- especially in the context of a settlement resolution. I tried to look it up again but could not find what I was looking for. Somewhere I have my source notes for the definition -- I'll look for them and post an update.

However, the insolvency test for one of the other triggers -- #8 for instance -- well, I don't know.

By the way, the correct form # is 982 -- not what I posted earlier.

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Wow, thanks for the hugely informative posts.

IMO, this means that if you settle a debt today, and they don't issue the 1099c for 3 years, its your income 3 years from now that determines insolvency.

Everything I have read has given me this impression as well: No date other than the issue date of the 1099 is used for insolvency. So, insolvency is not an option. At the time these debts were incurred, I was clearly insolvent. But 14 years later, I am not.

This is not identity theft either. I'm reasonably sure I owed that debt on a credit card, and I can believe that they are the JDB that eventually bought it, although neither of these have ever been proven to my satisfaction. But I have no idea how much the amount was.

I understand how the 1099 is issued, and why they had to do it. I suspect it was either they decided to give up on the debt (#7) or possibly lack of activity (#8). It's a moot point either way.

From what I've been reading, it certainly looks like the IRS has absolutely no interest in this matter. Validation is an FDCPA issue, and they couldn't care less. They want the taxes on what they consider to be a valid 1099.

As I read the instructions, the short version of what the IRS says about defining the amount of the debt to be reported on the 1099 is "everything less accrued interest and other penalties and fees" -- which says to me principal.

This is the pivotal issue. My 1099 states an amount being canceled, and nothing for interest. The original bill they mailed me claimed a different amount, slightly higher than the amount they finally claimed (less than $10). The collection agency that owned the debt before them was trying to collect an amount $7,000 greater than this one. So the numbers being quoted on this account have been all over the place.

I find it hard to believe that the debt has been around for 14 years, and no one has added any interest, fees or penalties on. But that's what they're claiming on the 1099.

I'm really not sure where to go from here. I could contact the CA, and demand that they fix the 1099, or I'll...what? I got nothing. They can pretty much ignore me. Or even start collections up again, since the IRS claims this doesn't cancel the obligation.

Chances are, like everyone else, I'll just add it on my taxes and pay it. :( I really can't afford a battle with the IRS. If I thought there is any chance of winning a suit against the CA for issuing a fraudulent, that would be worth doing as I could win $5,000 in damages + costs. But I suspect a judge wouldn't consider this fraud. They may have put the wrong amount, but they probably put the amount they have in their records.

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I'd give you more rep if the system allowed me to, DebtGuy. Since I can't though, I'd like to nominate this as a sticky. That was a very informative post and addresses an issue that is likely to get even more frequently asked.

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This is the pivotal issue. My 1099 states an amount being canceled, and nothing for interest. The original bill they mailed me claimed a different amount, slightly higher than the amount they finally claimed (less than $10). The collection agency that owned the debt before them was trying to collect an amount $7,000 greater than this one. So the numbers being quoted on this account have been all over the place.

What you describe sounds to me like the DB did the best they could with the info they had. That does not guarantee it is accurate. Right now, given the age of the debt, I doubt that even God knows exactly what would be the right number.

I would suggest a gut test. If it was 14 years ago when the debt charged off, what is your best recollection? Surely, you have some memory. Does this sound even close? If so, stop worrying about it. If not, you can always go on a records search. It would be an incredibly long shot, but the place to start would be the OC.

But, I think the hard cold reality is pretty much what you said -- But I suspect a judge wouldn't consider this fraud. They may have put the wrong amount, but they probably put the amount they have in their records. -- that is probably the best defense the DB could ask for given the facts.

I find it hard to believe that the debt has been around for 14 years, and no one has added any interest, fees or penalties on. But that's what they're claiming on the 1099.

Just my interpretation -- I don't think they are making any statement at all about interest. Again, from the way I read the guideline, there should not be anything in the interest box unless this was a mortgage foreclosure.

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2. I think the most debate will be in regard to debts that have not been validated. Forgetting for a minute that there is no consensus for how to define validation, there is absolutely no out in the IRS instructions for the DB to get around issuing a 1099 for a debt that has been disputed.

While the IRS instructions lack anything specific that would allow a Debt Buyer to disregard a debt and not send a 1099-C, the entire premise of the instructions is that there is a valid and existing debt.

Failure to validate calls that into question. And even a validated debt could in fact be long-ago paid ... the row in the spreadsheet received by the purchasing debt buyer could in fact be the artefact of a bookkeeping error.

So the question would be "What degree of certainty that a debt exists is required on the part of a JDB before they are obligated to file a 1099-C when abandoning it?"

And I would think that receipt of a document calling that debt into question from the purported debtor would negate that sort of certainty, especially where the debt buyer was unwilling or unable to respond with documentation of their own.

How should the service handle this? How will they handle this?

Chances are your mileage will vary...

But a DV gives them a plausible excuse for not doing what they don't want to do anyway.

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Don't know if this will work for you, but I got a letter from IRS couple of months ago telling me my income for 2005 was unreported in the amount of +$10,000. and that I owed over $2,000. I called IRS and asked for a statement and what the $10,000 was. They told me it was a 1099 from Portfolio Recovery and sent me a statement.

I immediately wrote to Portfolio and told them I had never heard from them, had never owed $10,000 to anyone and to send me a complete accounting for the $10,000. Also sent a complaint to the NY AG and told Portfolio that if they didn't send a new 1099 with ZERO that I was going to pursue legal action.

I also wrote to IRS and sent them a copy of the letter I sent to Portfolio along with a fraud report.

Got a letter from IRS 2 days ago that my under reported income for 2005 is now ZERO.

Never heard from Portfolio -- however, it has obviously been fixed.

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Never heard from Portfolio -- however, it has obviously been fixed.

Kimmie,

If you never owed a debt to anyone, then this was clearly identity theft or a case of mistaken identity. Absolutely no one thinks that you or anyone should incur a tax liability because of the mistake of someone else. The IRS is absolutely crystal clear that no 1099 should be issued in a case of identity theft. My guess it that the theft affidavit you sent was the probative document.

What is not being said clearly here -- so I will just say it -- a lot of folks know they owed the debt and never paid it and are weaseling for an angle to avoid the tax liability just like they avoided paying the debt originally. A great deal of the conversation on this board about debt validation is all about trying to dodge a bullet. This is the zone where push comes to shove and a lot of head knocking will occur between the IRS, the DB and the debtor. Who wins? Probably no one.

I just see this as a huge problem because of the timing -- we are coming up on the 3 year anniversary of the DBA v Snow decision -- and the IRS trigger #8 for issuance of 1099s. There are tons of old debts in the portfolios of the DBs and they are going to be under the gun to deal with all this.

Flacorps expressed his view that a DV might be enough to cause a DB to just not issue the 1099. I don't know. But, I think the IRS will have their say on the matter fairly quickly. My guess is that the IRS will at least unofficially suggest some sort of dispute under oath -- like the identity theft affidavit.

For sure, some will fraudulently execute an identity theft affidavit. Some will get away with it. Some will not. Woe until those. I cannot recall if it was this thread or another one where I related a conversation with an acquaintance who is an FBI agent. He said they are getting requests to investigate certain identity theft affidavits on the basis of defrauding a federally insured institution (the same statue as the FBI investigates bank robbery). I'm just guessing now, but I could see some interest on the part of revenue agents during the audit process to ensure that taxes were paid on forgiven debts.

I am reminded or the nursery rhyme: Oh, what a tangled web we weave when first we practice to deceive. Debtors who decide to weave a lie could find themselves in a very tangled web.

Please do not be offended. I am not at all suggesting this was the case in your situation nor am I singling out anyone for criticism. I'm just saying I've been on the forum long enough to know that there a significant number of people looking for the easy way out and who would have little reservation about taking a short cut.

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I'm just saying I've been on the forum long enough to know that there a significant number of people looking for the easy way out and who would have little reservation about taking a short cut.
No, I would disagree. I think the majority of people are on the forum here because the "good" life has suddenly turned sour and they find themselves in circumstances that weren't entirely of their choosing.

They're not looking for an easy way out...they really would like to pay their bills and keep their good credit, but, somethings happened that's made that tough to do. And, the lies and half truths that CAs throw at them coupled with the convuluted laws and regulations our various branches of the the government have concocted makes it difficult to know who they owe what to.

In my years on the board here, I've only run across maybe 5 people who thought "gee, I'm gonna run up my credit cards, and then skip out on them". Everyone else, lost a job, a spouse, an income, a dream, a plan, whatever...and now they're trying to deal with it...without being taken advantage of by the "universal defaults" and "adjustable rate mortgages" and "junk debt buyers" and outright debt fixer scam artists.

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No, I would disagree. I think the majority of people are on the forum here because the "good" life has suddenly turned sour and they find themselves in circumstances that weren't entirely of their choosing.

I agree that the vast majority of people don't plan to run up their cards just to bail on their payments. The problem is that they don't plan. Period. And that most certainly is a circumstance of their choosing. The amount of willful ignorance in the country is astounding, especially when it comes to money matters.

Sorry, but the whole "not my fault" attitude that is so common on these boards verges on disgusting. Unless you take full responsibility for your circumstances, your circumstances will never improve. I'll be the first one to raise my hand and say "Yeah, I screwed up big time and I'm paying for it."

About the only people I have pity for are those who are here because of a devastating illness that cleaned out their savings account. The people who don't even have a savings account but have a $3k high-def TV deserve what they get.

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I agree with both of you in some ways. Here lately, there has been alot of finger pointing and lecturing on this board more than actual advice given.

I thought most of us came here to repair/build credit and help people out? I know that's what I came here for. And that's what I am still here for. xheadscratchx

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I read somewhere that credit card companies rarely file 1099s on unpaid debt. Anybody got any info on that?

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I have never owed +$10,000 on anything in my life so there was no way that 1099 could be accurate. It would seem to me that the JDB would at least have to show that it was, in fact, a valid debt and that the amount was correct. I still have absolutely no clue what it was all about since nothing on my CR ever even came close to that and Portfolio never reported anything nor did they ever contact me.

I filed the fraud report against Portfolio.

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I read somewhere that credit card companies rarely file 1099s on unpaid debt. Anybody got any info on that?

I think you read wrong. If the forgiveness was in excess of $600, every financial institution is required to send the 1099c. Banks probably have a better compliance rate than DBs since they have been sending the durn things basically forever.

I think the majority of people are on the forum here because the "good" life has suddenly turned sour and they find themselves in circumstances that weren't entirely of their choosing.

Well, I agree that none of us chose the crap that fell out of the sky into our life. I know that I did not make that choice. All I am referring to is how one deals with it. It is no secret here that I am not a fan of falsehoods from anyone and that no one has the right to lie because they had a hard time. I fully understand it happens, and frequently in my observation, but I don't have to approve or agree.

I thought most of us came here to repair/build credit and help people out?

I do more counseling and helping out that the majority here. I just don't help people lie their way out of their lousy credit history. And, every once in a while, I make a pain of myself by pointing out unethical behavior -- and getting kicked for doing so. Such is life.

It would seem to me that the JDB would at least have to show that it was, in fact, a valid debt and that the amount was correct.

Show who? I'm not defending the crap in their data files -- and that is what much of this thread is about. They have some data and they don't know that it is wrong or that the debt is not valid -- and the IRS says "do this". So they do. The DB would be delighted to not have that requirement. Go share your views with the IRS or your congressweasel.

This is just a problem the whole universe is going to have to work through. Eventually, all the crap will work its way out of the snake. About five or six years ago the majority of the OCs began to archive "forever" statement copies and their records -- so those things are mostly readily available today for use in court, etc by the DBs. As the older stuff dies and goes away, it will be replaced with newer and more reliable information. Until then, everyone lives with the problem. And, it indeed will be a problem for everyone. There are no winners in this deal.

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I just see this as a huge problem because of the timing -- we are coming up on the 3 year anniversary of the DBA v Snow decision -- and the IRS trigger #8 for issuance of 1099s. There are tons of old debts in the portfolios of the DBs and they are going to be under the gun to deal with all this.

The gun is not quite so bad ... they can sell the portfolio before the witching date. AFAIK, the new owner has its own brand new testing period.

What can the service do if the new owner is a special-purpose entity and it dissolves before 36 months are up, having collected on some debt and sold other debt, but still holding some burned out debt with an approaching witching date. It will just get lost in the shuffle.

In many cases, these debts should have had a 1099-C form issued in a tax year that is more than six years prior to the tax year for which the 1099-C was actually issued. If the taxpayer can prove that the forgiveness of debt occurred far enough in the past, the taxpayer should go scot-free under the existing rules that govern the IRS.

I don't think the taxpayers are the weasels. The government worked on yet another way to cadge some more revenue out of the taxpayer.

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I agree that the vast majority of people don't plan to run up their cards just to bail on their payments. The problem is that they don't plan. Period. And that most certainly is a circumstance of their choosing. The amount of willful ignorance in the country is astounding, especially when it comes to money matters.

Sorry, but the whole "not my fault" attitude that is so common on these boards verges on disgusting. Unless you take full responsibility for your circumstances, your circumstances will never improve. I'll be the first one to raise my hand and say "Yeah, I screwed up big time and I'm paying for it."

About the only people I have pity for are those who are here because of a devastating illness that cleaned out their savings account. The people who don't even have a savings account but have a $3k high-def TV deserve what they get.

I wanted to give you points for this, but I can't because I gave you some before. So I'll just say very well said!

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they can sell the portfolio before the witching date. AFAIK, the new owner has its own brand new testing period.

Hmmmm. Creative idea. I confess that I don't give the DBs much credit for creativity. It will be interesting to watch and see what happens.

I think I said somewhere that the ACA and DBA are both pressing the IRS for specific guidance and the IRS has promised to respond sometime this year. Specific guidance cuts both ways -- sometimes you get answers that help and sometimes you get answers that make you wish you had never asked the question.

The next 90 days should provide a lot of answers.

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Even better. Sell it to some foreign entity (maybe a captive one owned by the JDB, maybe not) that has no reporting requirement with respect to the debt. Maybe the debt is then worked by the JDB or an independent CA, maybe it's just forgotten. In any case, the need to file any 1099-C forms is utterly circumvented.

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Even better. Sell it to some foreign entity (maybe a captive one owned by the JDB, maybe not) that has no reporting requirement with respect to the debt. Maybe the debt is then worked by the JDB or an independent CA, maybe it's just forgotten. In any case, the need to file any 1099-C forms is utterly circumvented.

Again, an interesting and creative idea. My skepticism is rooted in the fact that the IRS has a history of closing loopholes for the purpose of tax avoidance. In the long run, I don't see the IRS much backing off some form of reasonably rigorous compliance. As a taxpayer, I hope they do not.

I am still thinking there will be some relief valve for those consumers who claim identity fraud. That will get the DBs off the hook and provide legitimate relief for true cases of ID theft. Now all the IRS needs to do is figure out how to deal with taxpayers who lie about the identity fraud.

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I discovered that when I was not looking, the IRS revised Form 982 and published some expanding instructions. Line 1b is the place to to report "discharge of indebtedness to the extend insolvent (not a Title 11 case [bankruptcy].

The instructions, like always, are written in Klingon. But, there is an example on Page 3 of the instructions that relates to line 1b

"Example: You were released from your obligation to pay your credit card debt in the amount of $5000. The FMV of your total assets immediately before the discharge was $7000 and your liabilities were $10000. You were insolvent to the extent of $3000. Check the box on line 1b and include $3000 on line 2"

Now, my Klingon to English interpretation of that is that the determination is computed the instant before the "discharge" -- in this case discharge not being used in the context of a bankruptcy but the discharge of the debt.

Logically, in the case of a settlement, the discharge and the issuance of the 1099 should be in the same tax year.

But, going back to some of our earlier conversations about the 1099 that shows up from some old debt -- well, I can't find anything in the instructions or Publication 525 (Taxable and Nontaxable Income) of Publication 908 (Bankruptcy Tax Guide) that says anything about the liability being in the year the 1099c was issued. I wish the instructions gave more examples for other situations.

Now, trying to follow the logical impact of that conclusion -- I've changed my mind about how this works.

In the case of a settlement, the discharge was the instant before the settlement. Computation takes place at that time. It is highly likely the 1099c would be issued during that same tax year. Result: minimal confusion.

In the case of a 1099 issued as the result of a regulatory trigger (like the 3-year issue or the determination of SOL expiration), the discharge would be the instant before that "event". Who knows when the 1099c would be issued -- but hopefully in the same tax year as the event. Result: minimal confusion if both in same tax year -- or maximal confusion if event and 1099 in different tax years (which to me would imply the need to amend prior returns).

Is any of this starting to make sense?

I'm going to go ahead and post this at the tail of the most recent 1099 thread so it all stays together and others can comment.

I am not a tax guy and I'm still looking for a definitive answer to this conundrum. Everything I can find says the liability ties to the event and not the issuance date of the 1099c.

Of course, all taxpayers know they are lawfully required to report the income even if they don't get a 1099c. Right?

The OP should obviously report the income even if no 1099c was received.

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I do not know how the IRS will treat certain taxpayers who may be able to argue that their debts were to be forgiven (according to the triggering criteria) in tax years that were 3 years or more prior to the actual issuance of the 1099-C form (years for which the IRS cannot go back and assess without some hint of fraud [and fraud only goes back 6 years]).

It's quite possible that a taxpayer who was able to set up the factual scenario appropriately in court would be able to avoid recognizing the income entirely. Other taxpayers might be able to shift the recognition back to tax years in which they were insolvent.

But neither tax court nor district court nor the court of federal claims (yer 3 options) are cheap or easy places to go.

As always, YMMV.

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